Warren Buffett's words of wisdom

(MoneyWatch) On Friday, Warren Buffett released his much awaited annual letter to shareholders of Berkshire Hathaway (BRK.A). Investors idolize Buffett with good reason. From 1965 through 2012 the book value of Berkshire Hathaway increased at 19.7 percent per year, more than twice the 9.4 percent return on the S&P 500 Index. And Berkshire Hathaway has never had a five-year period when it underperformed the S&P 500 (though that streak is now at risk as the index has outperformed for the last four years).

To me, the great irony is that despite the high esteem in which Buffett is held, many investors not only ignore his investment advice, but they tend to do exactly the opposite of what he advises. For example, while investors react to the latest economic news by darting in and out of the market, Buffett advises in his 2013 letter: "I believe it's a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of "experts," or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it."

So while Buffett was buying stocks through the financial crisis, individual investors were ignoring his advice and his actions and withdrawing hundreds of billions from stock mutual funds. This great irony is the focus of the first two chapters of my new book "Think, Act, and Invest Like Warren Buffett." They provide Buffett's advice on key investment themes and teach you to learn how to think about financial crises like Buffett (so that you can avoid the panicked selling that is all-too-common for so many investors).

There was one other particularly interesting note in this year's letter. While the Oracle of Omaha's track record is the stuff of legend, Buffett himself doesn't seem to believe that he can continue to deliver such results. Quoting from the letter: "Charlie [Munger] and I believe the gain in Berkshire's intrinsic value will over time likely surpass the S&P returns by a small margin." Perhaps he believes that because the company has become so large that it's no longer possible to achieve the kind of returns he has delivered in the past. That's one of the problems for successful active managers -- success sows the seeds of its own destruction. That's one reason why there's little evidence of any persistence of performance beyond the randomly expected.

Larry Swedroe is director of research for The BAM Alliance. He has authored or co-authored 13 books, including his most recent, Think, Act, and Invest Like Warren Buffett. His opinions and comments expressed on this site are his own and may not accurately reflect those of the firm.